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Special Bulletin
A Japanese Perspective on the International Energy Landscape (209)March 6, 2015

Russia's Gas Export Strategy to Respond to the New Situation
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn March 4, the Institute of Energy Economics, Japan held a seminar featuring a presentation
by Prof. Jonathan Stern, chairman of the Natural Gas Program at the Oxford Institute for EnergyStudies, who is known as an internationally recognized authority on natural gas problems. Prof.
Stern presented a very interesting analysis on Russia's gas export strategy under the new situation
since 2014. In the following, I would like to take up four points from his conclusion that I felt wereparticularly important.
First, Russia has changed its European gas market strategy. Europe is dominantly important as
oil/gas export destination and sales channel for Russia whose economy depends heavily on theoil/gas sector. In 2013, the European market absorbed 72% of Russian gas exports (pipeline gas andliquefied natural gas). Europe is a money-making market for Russia. Naturally, Russia has
positioned the maintenance of the money-making market as a basically important policy.
But the relationship between Europe and Russia has posted great changes. They include a
prolonged decline in demand in the European gas market. Economic stagnation, growth of coal,renewable energy and other rival energy sources, and competition from non-Russian gas have put
even potentially competitive Russian gas into a difficult position in the European market. In anotherdevelopment causing a major problem for Russia, the European Union enhanced the unbundling oftransportation services under its third energy package to form a unified regional market, promotemarket competition and secure market transparency, blocking Russian state-run gas company
Gazprom's plans to participate in or acquire gas sales companies and enhance control on pipelines inthe downstream gas sector. Furthermore, the Ukraine crisis has grown more serious since February
2014, prompting the EU to adopt reduction of its dependence on Russian gas as one of its key
policies.
Given that European market conditions for Russia have grown more unfavorable, Russia has
begun to set back its plan to expand into the downstream gas sector while viewing the Europeanmarket as still important. While giving priority to forming direct relations with European users in amanner to get around the problem of gas supply via Ukraine, Russia has growingly seen Europe as asimple business partner rather than a strategically important market as conceived in the past, Prof.
Stern noted.

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Second, he pointed out that Turkey has been rapidly growing more important for Russia withinor in comparison with the European market. This change is based on Russia's realistic decision in asense. Russia gave up on the South Stream gas pipeline plan to link Russia to Eastern Europe andWestern Europe via the Black Sea late last year and began to consider the Turkish Stream gaspipeline plan to bridge itself to Turkey via the Black Sea. This is because the Turkish market isexpected to further grow and the gas pipeline is set to become a leading channel to Europe getting
around Ukraine.
The third point Prof. Stern made is the Russian gas strategy's accelerated shift to Asia. WhileEurope, excluding Turkey as mentioned above, is unlikely to expand its gas market, gas demand in
the Northeast Asian market including China is well expected to increase for various reasons. ForRussia, the strategy of enhancing access to the new expanding market speaks for itself. Given theinternational political environment for Russia, the enhancement of its China strategy is dominantly
important in its Asia strategy. China's gas market is actually expanding and is expected to expand
over a medium to long term, despite the possibility of economic deceleration. Russia signed acontract with China for gas sales via an eastern route last May and a memorandum for sales via awestern route last November. China is now one of a few countries with which Russia can have large
scale business negotiations. As a matter of course, Russia may have expectations on the Japanesemarket from the viewpoint of its diversification of Asian customers (to avoid its heavy dependence
on China). But Prof. Stern noted that Russia giving top priority to China would be important fromthe viewpoint of a realistic strategy. This means that the problem is how realistic deals with otherAsian countries would be for Russia.
Fourth, Prof. Stern pointed out that Russia's gas strategy is now giving priority to pipeline gas
exports again. Russia has planned to launch various LNG projects for Europe and Asia to become aglobal LNG player. But Asian LNG buyers have grown more cautious about signing new long-term
LNG purchase contracts with Russia even amid an easier supply-demand balance due to Westerncountries' economic sanctions on Russia after the Ukraine crisis and various other market
uncertainties. Furthermore, crude oil price drops have made it necessary to revise the profitability ofLNG projects. These developments have prompted Russia to take a realistic approach, giving
priority again to pipeline gas exports for which it has abundant experiences and capabilities.
Excluding some such as the Yamal LNG project, Russian gas export projects that have made specificprogress or that are under serious consideration are all for pipeline gas exports, represented by theTurkish Stream and China-Russia pipeline projects. Pipeline exports are accompanied by export tax,
while LNG exports are free from such tax. For the Russian government plagued with financial
difficulties under low oil prices, export tax revenues from pipeline gas exports would be important.
The four Russian gas strategy changes have come as Russia has been required to revise its
strategy in response to new difficulties. The Russian gas export strategy could change further,depending on future situational changes. For the immediate future, however, it would be very
important for us to sufficiently understand the four points in analyzing the Russian gas problem.

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Contact: report@tky.ieej.or.jp
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